Like many people with middle-class incomes, or less, I’ve spent a lot of time during the past several years finding ways to drive expenses down, saving money where I can. Sharing tips and success stories with readers is what this column is all about.
But constantly watching expenses can be tiring, and some ways to save money can be time-consuming, so it’s fair to ask: How do we know when we’ve achieved success in managing our personal and household finances? When can we relax a bit?
I’ll attempt to answer that question, but I know many of us have not reached that point yet, and 2013 is shaping up as another year when many working people and retirees will have to find ways to cut further expenses just to stay even.
The nation’s Social Security recipients this week learned they will get a 1.7 percent cost-of-living increase for 2013. Rising costs for health care, utilities and food will likely make that increase, averaging $21 a month, evaporate.
But many working people are unlikely to see their take-home pay rise at all next year. That’s because a temporary reduction in the federal payroll tax rate that’s been in place since the start of 2011 expires at the end of 2012, and neither major party is pushing to extend it.
The payroll tax that funds Social Security will return to 6.2 percent of workers’ pay, up from the reduced rate of 4.2 percent. For someone earning $50,000, the expiration of that tax break will cost $1,000. To calculate what it means to you, multiply your expected wages or self-employment income by 0.02, and remember that Social Security payroll tax will only be collected next year on wages up to $113,700.
What this means is that you’ll need a more than 2 percent pay raise just to keep your take-home pay from shrinking next year. To see your paycheck increase by as much as a Social Security check in 2013, you would need about a 4 percent pay hike, before taxes.
So here we are, nearly five years after one of the nation’s worst recessions began, and the need for money-saving strategies is as strong as ever, because that’s the only way many people will keep from falling further behind until the economy further strengthens.
The good news is that economic cycles do change. This downturn is taking a long time to shake off because of the real estate meltdown, but housing has been recovering for nearly a year now, which is encouraging.
The economy was also pretty grim when I graduated from high school back in 1983, during President Reagan’s first term. The unemployment rate was above 10 percent then, and had been higher than it is today for most of four years. I was lucky to be heading for college instead of into the job market that year And before I graduated college, the economy had turned around.
But even during that expansion, there was the October 1987 stock market crash, when the Dow Jones Industrial Average plunged nearly 23 percent in a single day (the 25-year anniversary of that crash was Friday). The economy was back in recession by the time I enrolled in graduate school in 1991, but by the mid-’90s we saw some of the best employment growth since the late 1960s.
So, those are examples of how the economy can take big swings up and down. It’s going to get better, sometime, but those ups and downs are a key reason to save for the bad times.
Keeping debt and expenses under control and building up savings are how we inoculate ourselves against economic downturns that may be entirely beyond our control, such as when a real estate crash ripples through the economy and eventually leads to teachers being laid off.
So, what are we trying to achieve, as we switch to cheaper cell phone plans, refinance mortgages, learn about tax credits, clip coupons, insulate our homes, take advantage of discounts and so on? When have we done enough to scrimp and save?
The answer can depend on personal circumstances, and what it takes for an individual to feel at ease. I suspect few people ever feel like they have enough money to be worry-free, but there are different levels of financial comfort.
If you’re drowning in high-interest debt, juggling overdue bills, and paying late fees and overdraft charges from banks and credit card companies, it’s all about eliminating every expense that’s not a necessity and getting things under control.
If you’re getting by but spending more than you earn and watching your savings dwindle, your short-term focus may be changing some habits, cutting back on discretionary purchases, and becoming a better shopper.
And if you’re managing to live on your income, then you may be focused on building up savings for emergencies, and investing for retirement or higher education costs.
The longer-term goals that financial advisers repeat — and these are very hard-to-reach goals for people who are not wealthy — are to eliminate high-interest debt, spend less than you earn, have a growing retirement account that’s on track to meet your needs, manage risk by having appropriate insurance policies and create an emergency fund equal to about six months’ salary.
Not there yet? Don’t worry, you’re not alone, and economic downturns don’t last forever.
Reach David Slade at 937-5552 or Twitter @DSladeNews.